Indiana's decision to deny Planned Parenthood funds under Medicaid because it performs abortions denies women the freedom to choose their healthcare providers, a federal hearing officer has determined.

The state had asked the Centers for Medicare and Medicaid Services (CMS) in Chicago to reconsider its June 2011 ruling that found changes in Indiana's Medicaid plan unacceptable.

But a hearing officer recommended in documents released Friday that a CMS administrator uphold the agency's initial decision.

The changes to Indiana's plan resulted from a 2011 law that would have made the state the first to deny the organisation Medicaid funds for general health services, including cancer screenings. The law has been on hold while the dispute works its way through the courts.

The Indiana attorney-general's office, which already is appealing a federal judge's order blocking the law, said it may also contest the panel's recommendation. The state had argued that the dispute should be decided administratively by the CMS, not in court.

"Because this is a recommendation, the attorney-general's office has a chance to file an exception to it before the CMS administrator makes a final decision," the agency said in a statement.

Planned Parenthood of Indiana said it was gratified by the decision.

"Through its appeal, the state was continuing its attack on women's rights and attempting to restrict access to basic, lifesaving services such as Pap tests, breast exams, STD testing and treatment, and birth control," Betty Cockrum, chief executive officer of Planned Parenthood of Indiana, said in a statement.

While Planned Parenthood officials had feared they might have to close some of the organisation's 28 clinics in Indiana or suspend some services because of a loss of Medicaid funds, that has not happened so far. Cockrum has said about 9,300 women rely on Planned Parenthood for their healthcare.

Indiana had argued that Medicaid funds intended to help groups like Planned Parenthood provide general healthcare would indirectly subsidize abortions. The Hyde Amendment, a 1976 provision named after the late Rep Henry Hyde bans all federal funds for abortion except in cases of rape, incest or when the life of the mother is at risk.

The state also said Planned Parenthood could continue to receive Medicaid funding if it established separate fiscal entities for abortion and other healthcare. But CMS said such an option was premature.

Hearing officer Benjamin Cohen wrote that the Indiana law violated the federal requirement that individuals must have the freedom to obtain care from any qualified provider. Restricting that choice just because a care provider also offers non-covered care isn't allowed, he wrote.

Indiana asked the seventh US circuit court of appeals in Chicago last August to lift US district judge Tanya Walton Pratt's 24 June 2011 preliminary injunction blocking parts of the abortion law. The court has not yet ruled.

Another federal appeals court ruled in May that Texas cannot ban Planned Parenthood from receiving state funds, at least until a lower court has a chance to hear formal arguments. A three-judge panel of the fifth circuit court of appeals agreed with a lower court that there's sufficient evidence the state's law preventing Planned Parenthood from participating in the Women's Health Program is unconstitutional.